Sunday, April 22

The Dividend Project - Analyzing The Major Banks

Today we are back to looking at dividend stocks and I am going to start the analyzing of the major banks. This will probably take more than one post, but I will at least get started today.

Fully one third of the 47 companies listed on the Mergent Canadian Dividend Acheivers list are in the sector "Finance and Insurance". These 16 companies include the 5 major banks, 2 smaller banks, 4 insurance companies, 2 mutual fund management companies, and 3 that I can't identify (HCG, PWF and IGI - please let me know if you know what they do).

So I think that I don't need to justify why this sector is being included in The Dividend Project. We will just start right in with the candidates:

Bank of Montreal (BMO)
Bank of Nova Scotia (BNS)
Canadian Imperial Bank of Commerce (CM)
Royal Bank of Canada (RY)
Toronto Dominion Bank (TD)

All five of these stocks appeared on the list in the recent Globe article I pointed to earlier and they all have 10 year+ track records of paying dividends. Further, this article conveniently provides the 10 year compounded dividend growth rates of these stocks. For ease of reference I have reproduced the numbers below:

BMO 12.51%
BNS 16.34%
CM 10.84%
RY 15.77%
TD 13.11%

And from these numbers, we can conclude that all five of these stocks fulfill our first two requirements of 10 year dividend history and dividend growth.
Here is the current dividend yield for the five banks:

BMO 3.78%
BNS 3.12%
CM 3.08%
RY 3.07%
TD 3.08%

Very interesting! Other than BMO, the group is yielding with a very narrow 0.05% range.

Also, all five of these stocks have less than 2% difference between their share price growth and dividend growth according to the Globe story, which means that their yields probably stay in a fairly narrow range unless the 10 years that he looked at were an anomoly.

To test this theory a little I looked at RY on the first of the month (or last close prior if it was a weekend or holiday) back to November 2003 and found the range of the dividend yield went from 2.60% to 3.49%.

So basically, what this evidence suggests is that these companies will increase their dividends by an average of 10-16% per year and that they share price will go up by very close to the same amount to keep the yield close to the same. In other words, you can expect to gain about 13-19% per year in dividends and capital gains. Wow. That's huge!

So my guess is that solid performers like this never get really cheap, but let's take a look at the price to earnings ratio to see what it looks like. This number is supposed to tell you how much you are paying for every dollar that the company earns in a year. Since earning money means dividends and share price growth, some people would actually say that when you are buying stocks you are really buying earnings. Here are the P/E numbers:

BMO 14.10
BNS 14.50
CM 12.62
RY 15.49
TD 15.65

Again, it is remarkable how close these numbers are. Other than CM, there seems to be a very common range that the investors think the banks are worth.

to be continued...


Canadian Money said...

The returns do look attractive for dividend stocks.

I wonder if the dividend helps make these stocks look more attractive during down or sideways market periods?

Philip B. said...

Good article and exposition. Keep up the good work. I currently own CM through a DRIP and SPP. I am able to reinvest my dividends into more shares and purchase additional shares monthly for as little as $100, all with no fees. I plan to hold this stock til retirement, stop the DRIP and collect the ever increasing dividends.

the money diva said...

I think you are correct in this assumption. In fact, I have read that good dividend stocks tend to avoid the worst of bull markets.

Thanks for dropping (or should I say DRIPing?) by!